Nixon, J.
The pleadings and stipulations present two questions for consideration:
(1) "Whether the complainants are entitled to have the check, which was deposited by them for collection on the twenty-ninth day of October, 1881, and not forwarded until after the bank was closed, returned to them on account of tiie insolvency of the bank.
(2) "Whether the receiver should allow to the complainants the balance due to them from the bank, at the time of its failure, as an offset to their indebtedness upon tho two promissory notes for $15,000 each, and respectively dated July 19 and August 15, 1881.
There is no difficulty about the facts of the case. All the material facts are admitted. The complainants were the regular customers of the bank, and were the owners of Hague & Billings’ check upon the American Exchange National Bank of New York for $11,781.93, payable to their order, which they indorsed generally and left with the Newark bank for collection. It was the custom of the bank, at least in regard to these depositors, to credit their account with such foreign checks when left, and to enter the amount at once upon their pass-book. Such credits were made in this case on the twenty-ninth of October, when the check was deposited for collection. The bank was then indebted to the complainants in the sum of $7,090.70 on previous deposits, and the credit of the check in question increased its indebtedness to $18,872.63, for which sum the complainants were entitled to draw. The next day was Sunday, when the cashier revealed to the directors the insolvency of tho bank. Its doors were closed on Monday. A government examiner took charge at once, and finding the check still in the hands of the bank he forwarded it to New York for collection. It was not paid by the drawers,—its payment having, in the mean time, been stopped. It has never yet been paid, although the makers are pecuniarily responsible.
The complainants claim that they are entitled to the return of the check:
(1) Because, although it was indorsed generally, and the amount had been credited to the depositors upon their pass-book and the books of the bank, the deposit for collection did not make the check the property of the bank, the bank continuing to be tho agent of the customers for its collection, and the check remaining, in the mean time, the property of the depositors. (2) Because it was fraudulent on the part of the bank to receive the check for collection at a time when it was insolvent, tho insolvency being caused by and known to the cashier, who had been intrusted by the directors with the general management of the business of tho association.
[682]*682With regard to the'first claim there seems to be no well-settled rule. I was under the impression, on the argument, that the weight of authority was in favor of the doctrine that, whenever a banking association gives credit upon its books to a depositor for the amount of a cheek or negotiable paper deposited for collection, the title.to the check or paper immediately passed to the bank, and it became the holder of the same for value. But I am satisfied, upon reflection, that this is not true, without qualification.
When the deposit was made and credited in order to make good an overdrawn account of the customer, or where the amount thus credited was immediately drawn against, the bank is undoubtedly to hold the check, at least, until the overdraft of the account is made good from other sources, or the cash drawn on the strength of the credit has been returned. The first of these conditions existed in the case of Titus v. Mechanics’ Nat. Bank, 6 Vroom, 592, and the opinion of the court of errors of New Jersey must be construed in reference to that fact. The learned counsel of the defendant also relied upon the decision of the chancellor in Terhune v. Bergen Co. Bank, 7 Stew. 367, in support of the doctrine. But the controlling fact in that case was that the checks, which were credited to the account of the depositor by the Bergen County Bank, had been forwarded to the Chatham National Bank of New York for collection, and had been collected and the proceeds credited to the Bergen County Bank before its failure. The claim there was that the depositor was entitled to preference in payment over other depositors.
It was correctly held that the complainant was only a general creditor of the bank for the proceeds of the collection, and must accept his dividend like other depositors. Such was declared to be the rule in Foley v. Hill, 2 H. L. Cas. 28, in which the relations of the banker and customers are very ably discussed and stated. The claim of the appellants was that the relation was that of trustee and cestui que trust; but their lordships held that it was rather that of debtor and creditor. When the customer deposits cash with the bank it ceases to be the money of the depositors, and becomes immediately the property of the bank; but when he deposits a cheek for collection in the absence of any special contract, the property in the check remains in him, and the bank becomes his agent for its collection, and has no responsibility in reference to its payment, except that it assumes to neglect no duty in the matter of its collection. When the collecting bank has notice of its payment, and is credited [683]*683by its correspondent with the proceeds, it then becomes the debtor to the owner for the amount of the check.
The case (Ex parte Richdale, In re Palmer, 19 Ch. Div. 409) was also cited by the counsel of the. defendant in support of the rule that the moment the check was credited by the bank to the depositor it became the property of the bank, and it was its holder for value. It is true' that the master of the rolls, (Jessel,) in reviewing the decision of Bacon, C. J., did state that doctrine as the law, but it was obiter dictum in tiie case, and the court expressly alleged that they preferred to base their decision on the ground that the transaction came within, and wras protected by, the provisions of the ninety-fourth section of the bankruptcy act of 1869.
In the present case the receiver’s counsel insist that the indorsement of the check to the bank, and its credit upon its books and upon the pass-book of the complainants, are conclusive evidence of a special contract that the check should at once become the property of the bank for value. The reply is twrofold: (1) That in all cases where credits are thus made banks claim and always exercise the right of charging checks returned to them for non-payment to the account of the depositor, which could not be done if the check had become the property of the bank, and did not remain the property of the depositor until collected. (2) The practice, which has grown up among banks, to credit such deposits at once to the account of the depositor, and to allow him to draw against them before the collection has been made, is reckoned by the ablest text writers, a mere gratuitous privilege, which does not grow into a binding legal usage.
Morse, in his treatise on Banks & Banking, in discussing this subject in his chapter on “Collections,” p. 427, says:
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Nixon, J.
The pleadings and stipulations present two questions for consideration:
(1) "Whether the complainants are entitled to have the check, which was deposited by them for collection on the twenty-ninth day of October, 1881, and not forwarded until after the bank was closed, returned to them on account of tiie insolvency of the bank.
(2) "Whether the receiver should allow to the complainants the balance due to them from the bank, at the time of its failure, as an offset to their indebtedness upon tho two promissory notes for $15,000 each, and respectively dated July 19 and August 15, 1881.
There is no difficulty about the facts of the case. All the material facts are admitted. The complainants were the regular customers of the bank, and were the owners of Hague & Billings’ check upon the American Exchange National Bank of New York for $11,781.93, payable to their order, which they indorsed generally and left with the Newark bank for collection. It was the custom of the bank, at least in regard to these depositors, to credit their account with such foreign checks when left, and to enter the amount at once upon their pass-book. Such credits were made in this case on the twenty-ninth of October, when the check was deposited for collection. The bank was then indebted to the complainants in the sum of $7,090.70 on previous deposits, and the credit of the check in question increased its indebtedness to $18,872.63, for which sum the complainants were entitled to draw. The next day was Sunday, when the cashier revealed to the directors the insolvency of tho bank. Its doors were closed on Monday. A government examiner took charge at once, and finding the check still in the hands of the bank he forwarded it to New York for collection. It was not paid by the drawers,—its payment having, in the mean time, been stopped. It has never yet been paid, although the makers are pecuniarily responsible.
The complainants claim that they are entitled to the return of the check:
(1) Because, although it was indorsed generally, and the amount had been credited to the depositors upon their pass-book and the books of the bank, the deposit for collection did not make the check the property of the bank, the bank continuing to be tho agent of the customers for its collection, and the check remaining, in the mean time, the property of the depositors. (2) Because it was fraudulent on the part of the bank to receive the check for collection at a time when it was insolvent, tho insolvency being caused by and known to the cashier, who had been intrusted by the directors with the general management of the business of tho association.
[682]*682With regard to the'first claim there seems to be no well-settled rule. I was under the impression, on the argument, that the weight of authority was in favor of the doctrine that, whenever a banking association gives credit upon its books to a depositor for the amount of a cheek or negotiable paper deposited for collection, the title.to the check or paper immediately passed to the bank, and it became the holder of the same for value. But I am satisfied, upon reflection, that this is not true, without qualification.
When the deposit was made and credited in order to make good an overdrawn account of the customer, or where the amount thus credited was immediately drawn against, the bank is undoubtedly to hold the check, at least, until the overdraft of the account is made good from other sources, or the cash drawn on the strength of the credit has been returned. The first of these conditions existed in the case of Titus v. Mechanics’ Nat. Bank, 6 Vroom, 592, and the opinion of the court of errors of New Jersey must be construed in reference to that fact. The learned counsel of the defendant also relied upon the decision of the chancellor in Terhune v. Bergen Co. Bank, 7 Stew. 367, in support of the doctrine. But the controlling fact in that case was that the checks, which were credited to the account of the depositor by the Bergen County Bank, had been forwarded to the Chatham National Bank of New York for collection, and had been collected and the proceeds credited to the Bergen County Bank before its failure. The claim there was that the depositor was entitled to preference in payment over other depositors.
It was correctly held that the complainant was only a general creditor of the bank for the proceeds of the collection, and must accept his dividend like other depositors. Such was declared to be the rule in Foley v. Hill, 2 H. L. Cas. 28, in which the relations of the banker and customers are very ably discussed and stated. The claim of the appellants was that the relation was that of trustee and cestui que trust; but their lordships held that it was rather that of debtor and creditor. When the customer deposits cash with the bank it ceases to be the money of the depositors, and becomes immediately the property of the bank; but when he deposits a cheek for collection in the absence of any special contract, the property in the check remains in him, and the bank becomes his agent for its collection, and has no responsibility in reference to its payment, except that it assumes to neglect no duty in the matter of its collection. When the collecting bank has notice of its payment, and is credited [683]*683by its correspondent with the proceeds, it then becomes the debtor to the owner for the amount of the check.
The case (Ex parte Richdale, In re Palmer, 19 Ch. Div. 409) was also cited by the counsel of the. defendant in support of the rule that the moment the check was credited by the bank to the depositor it became the property of the bank, and it was its holder for value. It is true' that the master of the rolls, (Jessel,) in reviewing the decision of Bacon, C. J., did state that doctrine as the law, but it was obiter dictum in tiie case, and the court expressly alleged that they preferred to base their decision on the ground that the transaction came within, and wras protected by, the provisions of the ninety-fourth section of the bankruptcy act of 1869.
In the present case the receiver’s counsel insist that the indorsement of the check to the bank, and its credit upon its books and upon the pass-book of the complainants, are conclusive evidence of a special contract that the check should at once become the property of the bank for value. The reply is twrofold: (1) That in all cases where credits are thus made banks claim and always exercise the right of charging checks returned to them for non-payment to the account of the depositor, which could not be done if the check had become the property of the bank, and did not remain the property of the depositor until collected. (2) The practice, which has grown up among banks, to credit such deposits at once to the account of the depositor, and to allow him to draw against them before the collection has been made, is reckoned by the ablest text writers, a mere gratuitous privilege, which does not grow into a binding legal usage.
Morse, in his treatise on Banks & Banking, in discussing this subject in his chapter on “Collections,” p. 427, says:
“ Where the customer deposits in the bank commercial paper for collection, at the same time indorsing it over to the bank, the parties understanding that it is only intended by the indorsement to put the paper in such shape that the bank can collect upon it, the title in the paper does not thereby pass to the bank, nor does the bank owe the amount to the customer until such time as the collection is actually consummated. .Neither is this strict right of the bank curtailed or altered simply because a practice has been allowed to prevail by which it has allowed the depositor to draw against deposits of paper for collection before the collection has been actually made. This is a mere gratuitous privilege allowed by the bank, which does not grow into a binding legal usage. Thus, it is very common for depositors to deposit checks with their banks, and to draw against them on the same day checks of their own, which may be presented for payment before the bank has had an opportunity to collect upon the deposited checks. In such cases banks are ire[684]*684quently wont to Honor such checks of their customers upon the confluence that the deposited checks wall he duly paid. But this habit of the banks is a pure favor, and if there be no distinct understanding to change the natural effect of such dealing, its long continuance gives no real right whatsoever to the depositor to demand its continuance or its practice in any individual case wherein the bank may, for any arbitrary reason, see fit to withhold that favor. Scott v. Ocean Bank, 23 N. Y. 289. In England, a decision given by Lord Ellenborough (9 East, 21) went much further even than this. Bills, not yet due, were sent to a country banker to collect. According to the custom of country bankers these were actually entered in the banker’s own books to the depositor’s credit, with the proper discount, and he was thereafter entitled to draw against this credit before the actual collection. Upon the subsequent failure of the banker, before the collection, it was held that the title in the bills had n ot passed to him, and that the depositor should recover them specificially, or their amount, if the bankrupt’s assignee had already made the collection.”
Nothing more than this is asked for by the complainants in the case under consideration. The accounts between the depositors and the bank were in nowise changed from the date of the deposit to the closing of the doors of the bank against further business. It is true, the credit had been entered on the books of the bank; but it was not to make good an overdrawn account, and if it enabled the depositors to draw against the credit, they had not, in fact, done so. The check was still in the hands of the bank when it stopped. It was, perhaps, a gratuitous,act for the bank examiner to send it forth for collection. But, whether it was so or not, it was not honored by the bank on which it was drawn, and was returned unpaid to the receiver.
The naked question is whether, under such circumstances, the right to recall the check remained with the depositors, or whether it had passed beyond their reach. I see no reason, in principle, which should not allow them to recall it. It was their property until collected. If the bank had continued business, and the check had been returned unpaid, it would have been charged up to their account and handed back' to them. The receiver, in the new condition of affairs growing out of the insolvencf, represented the bank, and when the check came back to him ought to have charged the account of the depositors with the amount and returned it to them.
This view of the case renders it unnecessary for me to consider whether the complainants were entitled to its return on account of the fraud which is alleged to have been comniitted by the officers of the bank in receiving the check for collection when the cashier, acting for the directors, was aware of the total insolvency of the association. It is proper, however, to observe that no knowledge by any [685]*685of the officers of the bank of its insolvency is sufficient to avoid the transaction, unless the evidence clearly shows that the directors, who represent the corporation, also had such knowledge.
I have much less difficulty with regard to the other question raised by the pleadings and the evidence, to-wit, the right of the complainants to offset the amount of their credit on the books of the bank, at the time of the failure, against the two promissory notes, for $15,000 each, which the bank had received from them for discount in the months of July and August preceding the failure.
It is unquestionably true that if the Newark bank held these notes at the time of the failure, a,nd was entitled to receive the amounts due thereon when they matured, such offset might be made. But the evidence is clear that at that date the notes were not the property of the Newark bank, but had been indorsed away for value. The facts are that the second of these notes, dated August 19, 1881, was never discounted by the Newark bank. It was sent to the Mechanics’ National Bank of New York for discount, and the proceeds were duly credited to the makers on the books of the Newark bank. When it fell due it was still the property of the,New York bank and was paid to it by the makers—the Newark bank having no interest whatever in the note or its proceeds.
The first note, of July 19, 1881, stands in a different position, but not in one which allows the offset to be made as demanded. It was regularly discounted by and became the property of the Newark bank on the twentieth of July, 1881, and the proceeds placed to the maker’s credit on that day. Afterwards, in the month of October^ the Newark bank, having largely overdrawn its account with the Mechanics’ National Bank of New York, sent to the latter bank a batch of paper, which had before been discounted, in which was included said note of complainants, amounting in the aggregate to $142,000, as collateral security- for the payment of said indebtedness. The amounts of these notes, as they matured and were paid, were credited on the account, for the payment- of which they had been indorsed as collaterals. When the Newark bank failed there yet remained due upon said indebtedness upwards of a quarter of million of dollars, and the New York bank claimed, and I think had, the right to retain the indorsed notes (including the one of complainants) not due or paid, and to apply the proceeds as they severally and in the order in which they became due to the payment of the remaining indebtedness. When the said first note of complainants ma[686]*686tured, it was collected and the amount applied to the extinguishment of the said debt.
But when the notes were all collected the New York bank had remaining in its hands about $7,000 over and above what was necessary to pay said account against the Newark bank. It paid the surplus to the receiver, and the complainants insist that they have at least an equitable lien thereon, and that the receiver should offset the same by allowing said surplus to be paid on account of the last-named note. This claim cannot be allowed. It was the duty of the New York bank to apply the proceeds of the notes, as they were severally paid, to the extinguishment of the debt for which they were collateral, and when complainants’ note was paid and credited the receiver had no right to demand, nor was the New York bank bound to refund, any part thereof until the overdrawn account was fully paid. Nor will the receiver be permitted, as against the other creditors of the insolvent bank, to use any portion of this surplus to give a preference over them to the complainants.
' Let a decree be drawn in conformity with this opinion, with costs of the complainants.